Government agencies have a prima facie case for default termination when a contractor fails to deliver performance in a timely manner. However, even when terminating the contractor on this basis, the government must exercise its broad discretion fairly and reasonably. In this regard, when the government elects to allow a contractor to continue performance past the contract completion date, it may waive the due date and thus its ability to terminate the contract for default for the contractor’s failure to meet it, provided two conditions are satisfied. First, the government fails to terminate within a reasonable period following the default, indicating forbearance. Second, the contractor relies on the government’s failure to terminate and continues performing under the terms of the contract with the government’s knowledge and express or implied consent. A waiver of the contract completion date under such conditions protects contractors who may be under the impression that time is no longer of the essence and, as a result, continue to expend significant effort and resources even after the performance deadline has passed. In construction contracts, the government’s imposition of liquidated damages after a performance date has passed or an express reservation of its rights in the performance deadline typically renders this waiver doctrine inapplicable. However, the completion deadline may be waived in construction contracts when the liquidated damages provision is not invoked or the government otherwise fails to adequately reserve its rights with respect to the completion deadline. Once the original completion deadline is waived, the government must establish a new deadline before it can terminate the contractor for default for failing to make progress.

In Armed Services Board of Contract Appeals (ASBCA) No. 62753, a decision issued on May 1, 2023, the contractor’s default termination was converted into one for the government’s convenience after the Board determined that the procuring agency had waived the original contract completion date and failed to establish a new completion date. On July 31, 2018, the Navy issued the relevant task order under a previously awarded indefinite delivery, indefinite quantity (IDIQ) construction contract for the design and construction of a vestibule and replacement of the doors in Building 261 at the Naval Support Activity (NSA) Bahrain. The task order specified September 29, 2019, as the completion date and included a liquidated damages provision, establishing a $400 per calendar day rate for delay. The contractor had difficulty obtaining the necessary aluminum doors from its Italian supplier and, in June 2019, proposed installing anti-blast steel doors instead at no additional cost to the government. After a Navy contracting specialist indicated agreement with this request, the contractor submitted a proposal requesting a 180-day time extension in July 2019. On September 9, 2019, the Navy issued a unilateral modification with a partial notice to proceed but stating that the contract completion date remained unchanged. On September 25, 2019, four days before the task order completion date, the contractor submitted proposed specifications and drawings for the doors. The project remained incomplete as the September 29, 2019, deadline passed.

On October 15, 2019, the contracting officer’s representative (COR) sent an email to the contractor requesting information regarding the September 25, 2019 submittal. Over the next few months, the Navy and the contractor continued to communicate regarding a modification for the steel doors, with the contractor requesting additional time to complete the project. On January 5, 2020, the Navy sent a cure notice, which the contractor did not receive. The next day, the Navy project manager approved the contractor’s hardware submittal. On January 15, 2020, the government construction manager provided the contractor instructions for submitting product data and shop drawings. Both the project manager and the construction manager failed to mention the cure notice or the liquidated damages and made no attempt to reserve the government’s rights in the project completion date. On February 11, 2020, the Navy issued a show-cause notice to the contractor for failing to perform the task order within the time specified in its terms. The contractor was advised that the Navy was considering terminating the contract for default. Following a February 13, 2020, meeting with the government in Bahrain, the contractor placed an order for hardware and engaged a subcontractor for installation. On March 11, 2020, the contracting officer (CO) issued a modification directing the contractor to stop all work on the project. On September 15, 2020, the CO terminated the task order for default for the contractor’s failure to perform within the specified time. The contractor filed a timely appeal at the ASBCA.

In the appeal before the Board, the contractor argued that the termination for default was not justified because the Navy had waived the project completion date and failed to establish a new date. Although the CO terminated the task order for failure to perform within the specified time, the Navy argued before the Board that the default termination was justified because the contractor did not make adequate progress or provide necessary assurances of timely performance or cure. The Board agreed with the contractor despite the September 9, 2019, modification indicating that the completion date remained unchanged. The waiver doctrine, which is typically inapplicable in construction contracts, was applicable in this case. In this connection, the Navy’s first modification had failed to adequately preserve its rights in the completion date. The Board noted that it was unrealistic for the September 9, 2019, modification to retain the project completion date while simultaneously issuing a partial notice to proceed for work that would take months to complete. Thus, it was apparent that neither party expected the work to be completed by September 29, 2019, at the date of the issuance of the first modification. Moreover, the September 9, 2019, modification failed to even mention the task order’s liquidated damages clause or otherwise expressly reserve the government’s rights. Under the circumstances, the modification’s mere statement that the contract completion remained the same was insufficient to preserve the government’s rights in the original task order completion date. The Navy also failed to assess liquidated damages in the period following the September 29, 2019, completion date. Accordingly, the waiver doctrine applied in this case, even though a construction contract was involved.

Next, the Board discussed the application of the waiver doctrine factors to hold that the Navy had indeed waived the task order’s completion date. First, the Navy had failed to terminate the task order for default within a reasonable period following the default, which demonstrated forbearance. After the original completion date passed, the Navy did not assess liquidated damages or issue a stop work order for months. Instead, the Navy allowed the contractor to muddle through for six months, while continuing to authorize work on the project. This indicated to the contractor that time was no longer of the essence. Furthermore, the task order was not terminated for default until September 15, 2020, which was almost a year after the original contract completion date. Second, the contractor relied on the Navy’s failure to terminate and continued performance with the Navy’s knowledge and consent. Between the September 29, 2019, completion date and the issuance of the March 11, 2020, stop-work order, the contractor relied on Navy communications and authorizations and continued performance under the task order. During this time, the contractor placed orders for hardware and even engaged a subcontractor for installation. Thus, the second condition of the waiver doctrine was satisfied as well, and the Board held that the Navy had waived the September 29, 2019, completion date.

The Board determined that although the CO had terminated the task order for the contractor’s failure to perform the required work within the time specified in the task order, the Navy was nevertheless permitted to change its rationale for the default to the contractor’s failure to make progress. However, even the Navy’s changed rationale for default was rejected as the agency had not only waived the September 29, 2019, completion date but also failed to establish a new performance completion date. In this regard, the Board reminded the parties that after the government waives a contract completion date, it cannot terminate the contract for default based on the contractor’s failure to make progress without establishing a new completion date with which to measure the contractor’s alleged failure to make progress. Here, the Navy failed to establish a new contract completion date following the waiver of the September 29, 2019 deadline either unilaterally or in mutual agreement with the contractor. Therefore, the Navy’s revised rationale for default, based on the contractor’s failure to make progress, was not justified because the Navy waived the original completion date and failed to establish a new contract completion date. Furthermore, the Navy CO’s original rationale for the default termination, which was for the contractor’s failure to perform within the specified time, was also not justified because the government had waived the original completion date. Consequently, the contractor’s appeal of the Navy’s default termination decision was sustained, and the Board converted the default termination to one for the government’s convenience.

The government may waive the contract completion deadline if it elects to allow the contractor to continue performance beyond the original deadline. Such a waiver is more likely to be found in supply contracts because supply contractors that continue to operate in default typically incur costs that may not be recovered if the government later terminates the contract for default for their failure to meet the contract completion deadline. On the other hand, construction contracts generally allow payment for work performed after the completion deadline, with liquidated damages imposed as a remedy for the contractor’s failure to meet it. However, as demonstrated in the case above, the waiver doctrine may apply to construction contracts when the government does not adequately preserve its rights in the default deadline or assess liquidated damages. For the government to waive the completion deadline, it must indicate forbearance by failing to terminate the contract within a reasonable period following the default. Additionally, the contractor must demonstrate its reliance on the government’s failure to terminate by continuing performance after the original deadline, with the government’s knowledge and consent. The totality of the circumstances is considered to determine whether a waiver has occurred, including any government notice reserving the right to terminate for default. However, the mere presence of such a notice does not mean that waiver has not occurred. If the government waives the original completion deadline, it may no longer terminate the contract for default for the contractor’s failure to meet that deadline. Once the original deadline is waived, the government must also establish a new completion deadline before it can terminate the contractor for default for a failure to make progress or meet the new deadline.

This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.